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The Heritage Law Center, LLC Blog

Important Changes to Tax Planning for Estates Over $1M

POSTED ON: July 3, 2012

For most Massachusetts residents, one million dollars is a sizeable estate. For Massachusetts estate tax planning, the $1M mark is an important threshold because that is when Massachusetts imposes a tax on your estate when you die. The estate tax generally works like this: if your estate is valued at one dollar less than $1M you pay no estate tax, if it is one dollar OVER $1M, however, you are taxed on the ENTIRE amount—not just the amount that is over. Your estate includes not just bank accounts and investments, but also your equity in real estate, life insurance proceeds, annuities you own, vehicles, antiques, 401(k)s, business interests, etc. The tax rate is progressive, with a maximum rate of 16 percent.

In addition to the Massachusetts estate tax there is also a federal estate tax. Estates of people who died in 2011 and 2012 were exempt from federal taxation if the value of their estate was under $5 million. Because most families don’t have $5M in their estate, this tax was largely ignored. However, the federal estate tax exemption is scheduled to be lowered to $1M starting January 1, 2013. This will cause many Massachusetts families to be hit double by estate taxes – which can cause as much as 55% of your estate to go to the IRS when you die. Of course, Congress and the President can change this, but if there is no change, the exemption for both state and federal estate taxes will be $1M starting in 2013.

Because each individual has a $1M estate tax exemption, reducing or eliminating your estate tax exposure is entirely possible for couples with effective estate plans. By structuring your living trust with estate tax provisions, spouses can combine their exemption amounts, effectively doubling their protection. Without proper planning, the exemption of the first spouse to die is often lost and the family’s estate is severely reduced as a result.

There are also other estate tax reducing strategies, such as gifting or charitable trusts that should be explored before making any decision. The bottom line is, the families that plan ahead are the ones who benefit the most in the end. Call the Heritage Law Center today to discuss how your family can take the appropriate action to avoid this 55% estate tax.